Enron Fraud

The Enron scandal is considered as one of the biggest corporate scandals in the United States history. It was initially voted as Americas Most Innovative Company from 1996 to 2002. However, in 2001 several events led the Securities Exchange Commission to become suspicious of Enrons accounting practices as well as the valuation of its corporate assets. The first is the cancellation of the deal with Blockbuster, Inc which was followed by the resignation of Jeffrey Skilling, the companys Chief Executive Officer (MSN Encarta, 2008, p.1). Soon after, the company reported a third quarter loss of $628 million and an admission that due to an accounting error, it had overstated the companys net worth by more than $1 billion (MSN Encarta, p.1). These reports resulted in the loss of investor confidence leading to the companys filing of bankruptcy in the latter part of 2001. It was eventually found out that its reported financial condition was sustained mostly by a systematic and carefully accounting fraud. The company and its directors were plagued with so many lawsuits that the directors were forced to settle these suits personally. As a result, cases have been filed against the directors and officers of the company. Some of them have already been convicted and punished for their actions. Had the directors and offices exhibited professional values and ethics in its dealings with their stockholders and customers, they may perhaps be working until now and not subject of criminal prosecution. Because of the Enron scandal, Congress passed laws designed to strictly regulate the activities of corporations. One of these laws was the Sarbanes-Oxley Act of 2002. Financial Disclosure was once a requirement only among public officers. In business organizations it was an often neglected and taken for granted requirement. In view of the Sarbanes-Oxley Act, business organizations are now required to take seriously this requirement (Section 302, Sarbanes Oxley Act of 2002). For instance, it is now a corporate responsibility to accomplish financial reports. Failure to accomplish this requirement or the discovery of fraud in the accomplishment of this requirement exposes the company to liability for suits.

Worldcom Scandal
Worldcom was a telecommunications company that underwent a merger with fellow telecommunications company MCI in 1997; subsequent to the merger of these 2 giants within the telecommunications industry, the conglomerate company was renamed MCI Worldcom. In 1998, the telecommunications industry began to slow down and WorldCom's stock was declining. CEO Bernard Ebbers came under increasing pressure from banks to cover margin calls on his WorldCom stock that was used to finance his other businesses endeavors (timber, yachting, etc.). The company's profitability took another hit when it was forced to abandon its proposed merger with Sprint in late 2000. During 2001, Ebbers persuaded WorldCom's board of directors to provide him corporate loans and guarantees totaling more than $400 million. Ebbers wanted to cover the margin calls, but this strategy ultimately failed and Ebbers was ousted as CEO in April 2002. Beginning in 1999 and continuing through May 2002, WorldCom (under the direction of Scott Sullivan (CFO), David Myers (Controller) and Buford Yates (Director of General Accounting)) used shady accounting methods to mask its declining financial condition by falsely professing financial growth and profitability to increase the price of WorldCom's stock. The fraud was accomplished in two main ways. First, WorldCom's accounting department underreported 'line costs' (interconnection expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them. Second, the company inflated revenues with bogus accounting entries from 'corporate unallocated revenue accounts'. The first discovery of possible illegal activity was by WorldCom's own internal audit department who uncovered approximately $3.8 billion of the fraud in June 2002. The company's audit committee and board of directors were notified of the fraud and acted swiftly: Sullivan was fired, Myers resigned, and the Securities and Exchange Commission (SEC) launched an investigation. By the end of 2003, it was estimated that the company's total assets had been inflated by around $11 billion. On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection, the largest such filing in United States history. The company emerged from Chapter 11 bankruptcy in 2004 with about $5.7 billion in debt.. On March 15, 2005 Bernard Ebbers was found guilty of all charges and convicted on fraud, conspiracy and filing false documents with regulators. He was sentenced to 25 years in prison. Other former WorldCom officials charged with criminal penalties in relation to the company's financial misstatements include former CFO Scott Sullivan (entered a guilty plea on March 2, 2004 to one count each of securities fraud, conspiracy to commit securities fraud, and filing false statements), former controller David Myers (pleaded guilty to securities fraud, conspiracy to commit securities fraud, and filing false statements on September 27, 2002), former accounting director Buford Yates (pleaded guilty to conspiracy and fraud charges on October 7, 2002), and former accounting managers Betty Vinson and Troy Normand (both pleading guilty to conspiracy and securities fraud on October 10, 2002). Ebbers reported to prison on September 26, 2006 to begin serving his sentence.